Intermediate 1 FSR Project Part #3: Current Liabilities Goal: To practice recording contingent liabilities and reporting them in the financial statements. (See Topic Guides LE 4, 7, 8). Information: On July 15, 2022, PPI took out a special short-term note to finance the purchase of additional inventory needed for a large contract with a new client. The new, non-interest bearing loan was for $800,000 and must be repaid within 6 months of issuance. After the loan paperwork was signed, the bank transferred $736,000 to PPI and the company was able to start purchasing the needed inventory. While the purchase of inventory was properly recorded, no journal entries have yet been made for the note. PPI's management would like to know the effect of your adjustment on the following ratios: Current Ratio Times Interest Earned (Income before Interest and Taxes / Interest Expense) Assignment: Calculations 1. Make the appropriate journal entries, if any, to account for the new note (including any necessary changes to income tax expense). 2. Make any necessary changes to the financial statements. Critical Thinking 3. Calculate each of the required ratios using the original values (before any changes) and the updated values (after your changes). 4. PPI's finance team had several options to raise the funds for the needed inventory. They could have sold stock, issued a long-term nole, purchased the inventory on credit, or issued other financing, Ilow did their choice to issue a short-term note affect their financial position? Do you agree that this was the best of the available options? If so, please explain why it was the best available option. If not, please explain which other option you feel would have been the best and why. 5. PPI's Director of Finance argued that they should wait until they repaid the obligation to record the interest, after all it was technically a non-interest bearing note and the amount of interest was very small. What would have been the possible consequences of this option and who is likely to have been affected? hip Intermediate 1 FSR Project Part #2: Acquiring & Disposing of PPE Adjusting Journal Entries Basket Purchase Calculations Sales Price Machine 1 Machine 2 Conveyor Belt Storage Facility $737,000 Mkt Values $278.000 $268.000 $197.000 $287.000 $1,030,000 Entry for Recording Purchase of new PPE ISTIL Equipment Building Accumulated Depreciation Equipment $531,377 $205,623 Percentage 27.0% 26.0% 19.1% 27.9% 100.0% Cash S737.000 To record the purchase of the new set of equipment $198,990 + $191,620 + $140.767= 3531,377 $2.185 Loss on Sale Entry for Recording Disposal of Old Equipment Cash $21,850 $184.965 Adjusting Entry for the Tax Effect Income Tax Payable Sale of old machines to make room for new equipment. Accumulated depreciation = $209,000 - $24,035 = $184.965 5656 Basket Price $198,990 $191,620 $140,767 $205,623 $737.000 $209,000 Income Tax Expense To record change in taxes due to exchange 30% -32,165 = 3655 $656 Please note that all of the journal entry amounts have been rounded to the nearest dollar following PPI Co.'s formal policy. If you would like nejo learning to use Excel's ROUND function, please talk to your instructor. Sales Revenue Sales Revenue Less: Sales Discounts Sales Returns Net Sales Revenue Cost of Goods Sold Cost of Goods Sold Gross Profit PPI Co. Multi-Step Income Statement For Year Ended December 31, 2022 Operating Activities Selling Expenses Advertising Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense Total Selling Expenses Administrative Expenses Consulting and Legal Fees Expense Executive Salaries Expense Depreciation Expense Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense Utilities Expense Total Administrative Expenses Income from Operations Other Gains and Losses Rent Revenue Interest Expense EPS $511.875 $31.395 $375,375 $1,365,000 $223.519 $17.063 $1.194.375 $1.638.000 $235.463 $105.786 $204.750 Loss on Sale Income from Continuing Operations before Taxes Income Tax Expense Net Income $327,600 $1,296,750 $2.507,164 $27,300,000 $1,624,350 $25,675,650 (5174 036) $14,587,994 $11,087,656 $3,408 918 $5,916.08.2 $5.171.574 17690010). $5.080 664 ($11504.5171 30.547047. $ 1.14 Current Assets Cash A/R Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Utilities Total Current Assels Long-term Investments Loans to other businesses Expansion Fund Total Long-term Investments PPE Land Building Equipment Accumulated Depreciation Total PPE Intangible Assets Patents Total Assets Current Liabilities PPI Co. Balance Sheet As of 12/31/2022 Accounts Payable Income Tax Payable Unearned Revenue Wages Payable Current Portion of Loan Payable Total Current Liabilities 2022 Retained Earnings Total Stockholders Equity Total Liabilities and Stockholder's Equity $512,850 $1,365,000 $2,457,000 $2,320,500 ($85,995) ($682,500) $3,630,900 $3,822,000 $384,750 $409,500 $341,250 $273,000 $7,240,755 $7,507,500 Liabilities and Stockholders' Equity 2021 $1,092,000 $1,092,000 $819,000 $1,911,000 $3.003,000 $1,911,000 $2,389,623 $2,184,000 $7,966,377 $3,549,000 ($4.183,035) ($2,730,000) 39.175,965 $4,914,000 $819,000 $1,911,000 $409,500 $409,500 $18,737,220 $14,742,000 Long-term Debt Loan Payable Notes Payable Total Long-term Debt Total Liabilities Stockholders' Equity Common Stock $3,100,000 ($1 par $6,200,000.00 authorized, $3,100,000 outstanding Additional Paid-In Capital $819.000 $424,759 $1,638,000 $583,564 $273,000 $682,500 $409,500 $327,600 $341,250 $136,500 $136,500 $2,154.923 $2.798.250 $682,500 5819,000 $3,822,000 $2.184.000 $4,504,500 $3,003,000 SB 659,423 $5,801,250 53./100,000 $819,000 $8.158.797 $5.021.750 $12,077.797 $8.940.750 $18 737,220 $14.742,000 PPI Co. For Year Ended December 31, 2022 Cash Flow from Operations Net Income Adjustments: Change in A/R Change in Inventory Change in Prepaid Insurance Change in Prepaid Utilities Depreciation Change in A/P Change in Income Tax Payable Change in Unearned Revenue Change in Wages Payable Loss on Sale Net Cash Flow from Operations Cash Flow from Investments Sale of Equipment Purchase of Land Purchase of Building Purchase of Equipment Net Cash Flow from Investments Cash Flow from Financing Repayment of Loans Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing Net Increase (Decrease) in Cash Cash January 1, 2022 Cash. December 31, 2022 ($733,005) $191.100 $24.750 ($68,250) $1,638,000 ($1,213,241) $310.564 $273.000 ($13,650) $2.185 $21.850 ($1,092.000) ($205.623) ($4.626.377) ($136.500) $1.638,000 (5410.000) $3,547,047 $411.453 $3,958,500 ($5.902.150) $1,091.500 (5852.150) $1,365.000 Asset Turnover Net Sales Average Total Assets Current Ratio Current Assets Current Liabilities ROA Net Income Average Total Assets 232327 Ratio Analysis Before $25.675.650 $16,740.703 449 $2. 155.579 1.534 3.691 After $25.675.650 $16,739,610 $7.240,755 $2.154.923 $3.547 047 $16.739 610 3.360 0 212